Every small business has to set up an accounting cycle in order to manage its financial transactions. The accounting cycle starts by establishing your accounting system for the period, and at the end of the accounting cycle, you’ll be ready to close the books on that period so you can prepare for the next one. Here’s what’s involved with setting up your small business accounting cycle.
Develop a chart of accounts
As part of your accounting and bookkeeping system requirements, you need to set up a chart of accounts. This chart of accounts is an index of all accounts in which any small business will file financial information.
Source documents are all those paper records which provide evidence that a given transaction has occurred. As soon as possible, the transactions should be recorded as journal entries, for instance purchase orders, invoices, canceled checks, and all other documents relative to your business.
Anytime your small business makes some kind of financial transaction, it should be recorded as a journal entry in your accounting journal, so the transaction is permanently recorded. For small businesses using dual entry accounting, you would need to make a double entry, both a debit and a credit to the appropriate accounts.
The general ledger is the primary accounting record for any small business, and it will contain a record of all the business’s financial transactions. These will be taken directly from a general accounting journal, and moved in summary format to the general ledger.
Preparing a trial balance
Once the general ledger entries have been completed for an accounting period, the next step is to conduct a trial balance. During a trial balance, all the debits are totaled up, as well as the credits from the general ledger, to make sure that they balance out for the entire accounting period.
Adjusting entries are made at the end of an accounting period to your accounting journals. The purpose of these entries is to make adjustments to expenses or revenues incurred during the period. The main types of adjusting entries are prepaid expenses, depreciation, accrued expenses, and accrued revenues.
Preparing financial statements
One of the last steps necessary in the accounting cycle is preparing the financial statements. All the information coming from the general ledger and the accounting journals is used to develop the balance sheet, the statement of cash flows, the statement of retained earnings, and the income statement.
Closing entries made at the end of the accounting cycle are intended to set the balance of temporary counts back to a zero status, so the next accounting period can begin. The drawing accounts, expense accounts, and revenue accounts are all closed at this time, while assets, liabilities and equity accounts all have their ending balances set as the beginning balance of the next accounting period.
Do you need help setting up your accounting cycle and processes? Doerhoff & Associates knows you can use all the help you can get to launch your small business successfully, and we are here for you. We strive to provide what you really want and need – a unique and customized set of services to fill the gap and support you, the business owner.